Has the BoJ signalled the end of QE as we know it?

That’s what David Keohane asks in yesterday’s FT Alphaville based on recent Citi and Goldman research notes.

Citi’s Buiter:

“In some ways, it is startling that the BoJ, while admitting that inflation rates have weakened (even though still forecast to reach the target in 2019), left the policy rate unchanged and picked the new 10-year yield target around current levels. Today’s decision therefore does not imply any further easing.”

The BOJ’s unexpected new approach is probably a stopgap solution to three prickly problems;

They’ve become way too dominant in the JGB market.

The flattening of the yield curve and negative short rates are playing hell with bank profitability, and that of the financial system more generally.

What they’ve been doing isn’t working.

Even assuming steepening the yield curve might do some good and is practically possible, the attempt will bring a new bunch of problems in its wake. By focusing on price, the BOJ would lose control over quantity. If the targeted rate started to rise, they’d be committed to open ended purchases. If it fell below their target, they’d have to sell whatever’s necessary and maybe even “issue [fresh] obligations that could launch the price in the right direction.”

It’s a perfect little example of the rabbit holes that multiply when central banks try to change underlying reality by manipulating the symbols that ought, ideally, to simply reflect it. Each proposed “solution” generates unexpected problems which appear to require pulling on some fresh set of levers, or perhaps the same ones with even greater conviction.

Goldman thinks the BOJ will eventually plump for more radical negative rates:

“[G]iven that the BOJ seems to believe that this is the only policy tool that could be an effective means of correcting yen appreciation, we think it will inevitably become the BOJ’s policy tool of choice.”

That’s probably right, although I have occasionally wondered if it mightn’t eventually turn to hoovering up foreign assets. That would certainly solve the supply problem and should also do the trick in terms of knocking the yen on the head. Given how impolitic such a move would be, however, things would have to be pretty bloody dire.

The only real no no, it seems, is acknowledging the futility of all these unconventional policies.